Should You Choose a Fixed or Variable Interest Rate for Your Home Loan?

If we’ve realised anything over the last few years, it’s that predicting what’s going to happen in the economy is trickier than negotiating with a teething toddler. Add interest rates to the equation and you’ve got an extra guessing game.

As a homebuyer or homeowner, you might be wondering whether you should choose a fixed or variable interest rate for your home loan. Before you decide, let’s take a look at the advantages and disadvantages of fixed and variable interest rates.

The advantages of fixed interest rates

Hands up if you like certainty? If you prefer to know exactly (or as close to) what’s going to happen and don’t like surprises, then you may prefer a fixed interest rate on your mortgage.

The benefit of having a fixed interest rate means you should be able to predict the repayments you’ll pay over the term of the loan and be able to budget accordingly.

Additionally, if you manage to secure a fixed interest rate when rates are low, you’ve got a better chance of lowering the total amount of interest paid throughout the term of your home loan. Winning, right?

The advantages of variable interest rates

Variable interest rates may offer you flexibility over the term of your mortgage as you could possibly pay off your mortgage quicker if interest rates become lower over time.

A variable interest rate home loan’s conditions may also allow you to make extra repayments over time, which could help you save some money over the long term plus potentially assist you pay off your mortgage quicker.

The disadvantages of fixed interest rates

Everyone loves a good deal, which is why we get annoyed after paying full price for a product only for it to go on sale a week later.  

Imagine if you secured what you thought was a reasonably low interest rate then not long after the rates went even lower – you’d probably feel a bit miffed! Also, some lenders may have restrictions on you making additional repayments if your mortgage has a fixed rate so be sure to double check the terms and conditions.

Another disadvantage of a fixed interest rate is if you decide to refinance, sell, or change to a variable rate, you might have to pay a break cost. It’s best to read all the fine print before signing anything so you know exactly where you stand.

The disadvantages of variable interest rates

Life in general may feel a bit uncertain, and a variable interest rate could add to that feeling of uncertainty.  

You’re at the mercy of the cash rate and banks passing on any rises. So, you might start off with a low interest rate but if interest rates rise, you could be faced with paying more and potentially struggle to meet your repayments. The uncertainty may also make it a bit harder for you to follow a long term budget.

So which type of interest rate is better?

As with other aspects of your mortgage, you need to think about your individual circumstances before deciding which type of interest rate you prefer.

Some people might look at fixing part of their mortgage, so they have the security of a fixed rate home loan plus benefit from possible fluctuations in variable rates. There’s a lot of chatter about interest rates in general, but if you’re after personalised advice be sure to contact your home loan specialist.

Figuring out your home loan options doesn’t need to be difficult. Simply contact Pania to chat about your options.

Disclaimer: This is general information only and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.